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TRADING
TODAY'S MARKETS Note to FSO readers: I wrote this article a year ago, so the perspective is from May 2003. Let me make a few small points here: First, I am a full time stock jockey, I don't charge commissions or write a newsletter or obtain income in any way from other people. It's only being right more often than wrong on the markets that keeps me in the game. Second, in the year since I wrote the article, markets haven't really changed much except nice runs in silver and base metals provided enough upside volatility to "live another year" as an Internet trader. Third, though we are all worried about the 10-sigma event described by Jim here at FSO, we can trade before and after such an event, indeed if it happens. There is also no guarantee that "safe" strategies will shield us from disaster better than “risky" ones at such a time. Fourth, forget the fact the article is a year old. Good Trading Strategies don't change. Fifth, Caveat Emptor. Forward I almost didn't write this article. My circle of acquaintances knows what I do for a living, and periodically, someone asks me about how I do it. If they're sufficiently interested, I sit them in front of the computer and show them the trading screens, chat sites, online resource centers, charts, etc. etc. Some of them profess an interest in doing online trading, and I tell them how to get started and let them know I'll help them in any way I can. Well, while the last guy I had over was listening to my "Sell your mutual funds and get gold, because a credit crunch is coming" speech, he interrupted me to ask if anyone had actually followed up and started trading. The answer, of course, is nobody. I thought, what are the chances anyone would get anything useful out of what I have to offer in a trading article? I also have a healthy contempt for advertised market training systems and seminars. "If you're so successful, why do you need to sell me your system?". There's also no easy answers and anybody who promises 80% per year returns or 100% effective strategies are probably pitching not so little lies. I could see a lot of people looking at the title of this article and tossing it into File G. Fair enough. I might probably do the same. Finally, I wrote an article in 2000 for an investment site on "Trading the Tech Winners", which in retrospect was hogwash, since the boom had turned to bust. The site did not survive, but I did, but there's no guarantee that anything I proffer today will be useful tomorrow. Some of the techniques I outlined for the Tech winners are good general principles and worked in the gold bull of 2002, but things are different again now. The US dollar is in protracted retreat against the Canadian dollar and interrelationships are all changing rapidly. It's a different world. So why bother writing this thing? Why would anyone in their right mind start online trading now if they weren't already? It's downright nasty in the markets. As another friend expressed it, why was I the only one with the "brains, balls and luck" to do it and get it to work? I don't know. Partly desperation, I think. Anyway, do you want to make money on the stock markets in a very difficult environment? Apparently, there aren't many. Well, for anyone who might have the ears, here's what I have to say. Introduction It was exactly five years ago today that I made my first online trade, which gave me the idea for this article. Why is five years important? Well, there's a saying that it takes five years to make a good trader, and when I think of some of the mistakes I made, I cringe. I still make mistakes, but I'm a lot more comfortable with the process now, and am now confident that I can make a go of it in good markets or bad. When I started trading in 1998, I had a dead-end Dilbert type job; no tenure, just endless contracts with no benefits. It was being passed over for full-time status that induced me to ask "Who will provide for me when I get old?" I was lucky to get into the markets during the Tech boom, when the rising tide of stock values made a lot of people richer. Today, I don't work, often get up early to trade the markets (I'm on the West Coast), but it's my choice. I've made money every year since 1998, mostly on gold and silver since 2001. My wife and I like to travel. The money I've made has allowed us to see the art treasures of Europe (they are even better than you might imagine) in reasonable style, help the kids out, eat at fancy restaurants, try expensive wines, all of those things. For the most part, however, money is time for me. I just like having time on my hands to do whatever the hell I feel like. One of the things I enjoy doing is writing articles on subjects which interest me. I want to make more money. I'm not quite as rich as I want to get yet. What's your financial goal? It's a Jungle Out There If you elect to go into the jungle, there are dangers, but there are also rewards, unexpected beauty, and friends as well as enemies. You're going to leave behind whatever safety you thought you had, and take a chance. The relevant question is therefore how does a trader develop the requisite survival and developmental skills to make it in the jungle? It's hard making money the traditional ways in this country. You can't go into the bush with an axe and carve yourself a farm, and good union jobs are now few and far between. Starting a business is difficult, and there are numerous barriers to entry. I said earlier that I had made money every year since 1998. Well, I got clobbered in 1998 before wising up and I lost almost everything. At that time, I consulted the I Ching ("Book of Changes", a book of Chinese oracles) about how to make money on the markets. Was it a futile exercise to speculate? The advice I got couldn't have been clearer or more useful. If you want, you can save yourself some time by just skipping down to get the benefits of millennia of collected wisdom. It'll hopefully put your head in the right place and that is certainly more than half the battle. Dave's Tips 1. Don't Risk Money You Can't Afford To Lose It's quite simple. You need a clear mind and a minimum of emotional distractions. It's real money, and if you lose it all (and many do!), you should be able to move on. The markets are very impersonal. Nobody cares about your losses, nor should they. It also helps if you don't use given or borrowed money to play the markets. Earn it. If it's your money, you'll shepherd it better. In fact, the sheep analogy is pretty good. I'll leave it to your imagination to imagine the ramifications. Make that herd grow! Also, stay away from the non-listed companies which trade on the "pink sheets" for which the market is very thin (meaning it's hard to get in and out, or get meaningful quotes). Stick with listed companies. The information is more reliable, and you can make big returns on these established companies. 2. Know Thyself You are your own worst trading enemy. I can't emphasize this enough. I chuckle at people who blame brokers, Market Makers, unnamed big interests, "da boyz", or whatever, for stocks not going in the right direction. If you end up in a bad situation sitting on a big paper loss, unable to get out except by taking an even bigger real loss, ask yourself who got you into that mess. Watch a stock trade for a while before entering and learn its trading patterns to determine adequate risk levels. Know who you are and what gets you into trouble. All personality tendencies are sometimes useful, sometimes harmful; timidity, aggressiveness, overtrading, undertrading, trading out of boredom (my biggest fault), whatever. Pay attention to your own wins and losses and indulge in evaluation and self criticism. Question your own motives. I don't trade options (sometimes called derivatives), bonds, or commodities, and I don't short (selling a stock before you buy it, hoping it will decrease in price), but that's me. I like simple trades on listed stocks, but as you learn about yourself, you'll develop your own way of doing things. I've found that those who are successful on the markets all have a slightly different take on things. 3. Never Stop Learning You'll succeed in direct proportion to the time and effort you put into your trading and research. The Internet is a wonderful place, full of great information. Get some. Get more. Learn about grand business cycles, broker ratings and agendas, dollar policy, market history, and so on. Expand your knowledge. Surf into areas which catch your fancy. Verify opinions. Go to the places you enjoy learning. It's not school. The only report card is your net worth at the end of each market day, and the course never ends. Follow your passion. Are you passionate about it? I mostly missed the Nasdaq run of July 1999 to March 2000 because I was worried about a crash. If I had been reading about credit creation like I am now, I would have recognized that the Fed (Federal Reserve, the creator of US money) was pumping money like crazy into the system to prevent a Y2K (remember that non-event?) problem. That money was finding its way into Nasdaq stocks in a number of ways. If I had known this "liquidity" was going into a speculative blowoff, I would have acted accordingly and been on "Easy Street" today. See what I mean about learning? Seek opinions by joining an online chat site. Make friends on the chat site and find those people who have intelligent and useful things to say. Don't be afraid to ask questions, dumb or otherwise. It's your money. Nurture it. Follow what those people say and see if they are ultimately clued in, or clue-less. Stay way from the braggarts and those who claim special market knowledge. Those who make the best rates of return are often hard to spot and are loathe to offer advice on individual stocks. 4. You Can't Always Make Money What is happening right now (May 2003), is that the Fed is STILL pumping money like crazy, but it's going into real estate through the mortgage creation process. The great credit blow off in the US has gone parabolic (a rapid rise, usually meaning the end is near), but behind that, some market trends have ended, and others are about to assert themselves. In the interim, nothing much is happening in these other markets. You want to play the bond market or the Forex (Foreign Exchange) where the action is? You might be too late. My assignment to you is to think about "If twelve interest rate cuts to historical low levels and ultra-easy money aren't getting the real US economy going (look at unemployment levels and factory utilization), what is wrong?" Think about what trends are ending, and what other trends are starting, to direct your best investment choices. Remember that even the best laid plans can go awry. Those who played the airlines for a bottom bounce, anticipating government bailouts got blind-sided by SARS. It happens. If it happens to you, cut your losses and move on. 5. It's a Balancing Act This could also be titled, "There's no shame in cash". I periodically sell everything and sit out for periods of time. I'm 25% cash now. This is doubly applicable now when trends are hard to discern. What works and what doesn't work changes, and it's best to be flexible (NOT easy). Always ask yourself if you're in too deep or not deep enough. There's no magic answer. There are times to make money, and times to hide from the markets. The easiest time to lose a lot of money is just after you've scored a major success (that one is VERY hard to learn, at least for me). You must preserve capital during the bad times (sometimes, you're just plain unlucky, but you MUST limit your losses). I recommend small positions at first in anything, and only slowly add to winners. Never use margin (borrowed money) or indulge in any other market strategy which comes with the kicker, "Eventually you will get caught". When you have cash, you can wait for things to come to you (it happens a lot more than you might think). It usually takes time to make money. On the other hand, the periods when you can make a significant return are often brief. Be ready for those times, both getting in and getting out. It isn't an exact science. A bell doesn't ring at bottoms and tops. You'll miss significant moves protecting capital. 6. If You Find a Cash Cow, Keep Milking It If it keeps on working, keep on working it. One day, it won't work any more. Last year, Goldcorp was my numero uno cash cow. It hit the wall in January and I haven't found a new one yet. Something will eventually come along, though it's been a pretty tough year so far. You have to be somewhat ruthless, not with people, but with those fractional ownerships of companies (which is what stock is). If it can't deliver, you thank it for the good times, and find another stock. Loyalty to a company can be a trading flaw. After you've had a rough patch for a while, it seems like a winner will never come along again. But they do. Protect capital for those times. This is the key difference between a trader and an investor. A trader won't wait for something to turn around. He or she gets out. 7. Bring Something Else to the Table Give yourself an edge. If you understand an industry, great. Overseas knowledge? Fabulous. In my case, I took a technical trading course years ago and learned the basics of how to read a chart. It helps, and I base most of my trading on chart indicators, Also, I used to do turbulence research for oceanographic and climatic purposes. Stock price movements look a lot like oceanic turbulence. I'm comfortable with that aspect of the charts. Use your special knowledge or expertise to your advantage. Admit losses. Others can help you at those times. Don't seek or distribute insider information or engage in dubious behaviour. Most insider tips are bunk and I wouldn't want to profit by them in any case. You'll also be able to better identify those other honest people who nevertheless make very good returns. 8. Cut Your Losers Short, Let Your Winners Run Even if you think you understand the fundamentals and trading pattern of a particular industry or stock perfectly, trades can go against you. Trust "the tape" (what price the stock is trading at, and its action). That's where the money is. It rarely lies in the short term. Often, the fundamentals behind a move are only apparent after the stock has radically changed (e.g. Nortel, Enron, Exodus). Stocks go up, stocks go down. That's why you give yourself a loss level before terminating the trade. Determine a level (typically 10-15%) and STICK TO IT. Preserving capital is the number one job of a trader. Making money is number two. Remember that. Take the loss. At the other end, learn the signs of when a bull move has exhausted. You'll never buy at the bottom or sell at the top, but you'll sometimes come close. No harm in missing that last 15% of an up move. Be thankful for what you do make and move on. Again, after you have had a big winner, be particularly careful. It's easy to get overconfident and reckless at that time. 9. Learn the Rhythms of the Markets You can only take what the market is giving, and there are times when the market is in a very unforgiving mood. Protect yourself at those times. Remember that stocks and markets don't go in straight lines. Chasing something (buying after it has made a significant move) tilts the odds against you. If you watch something for a long time, sometimes it changes its trading pattern and you can profit from that. It's impossible to say whether you should watch a few stocks or many. There are advantages and disadvantages to both approaches. Whatever works. 10. Day Trading in Canada is a Waste of Time Three years ago, I used to day trade Nortel; buy the dips, sell the spikes. I'd be in and out two or three times a day, making a few hundred here, a few thousand there. It was the gift that kept on giving. Then one day, it stopped giving. Of course, that was when it was 100$ a share. With Canadian Cartel broker rates of about 30$ per thousand shares in and out (3 cents/share) today, you need a 1.5% move in Nortel (6 cents on a 4$ stock) just to cover your commissions. Add to that the spreads (difference between bid and ask price), and the odds have moved against you making money. Many other Canadian stocks are so illiquid (low trading volumes, large gaps between bid and ask, small lot sizes), that there's just no money in it. I would be very interested in seeing the daily volumes of Canadian online trading the past few years. There's no money in day trading, and since there's no money, people have disappeared. It's that simple. My Goldcorp cash cow was mostly on swing trades (1-3 days in duration), that sometimes turned into 1-2 week holds. But none of them ever got below that 15% loss point. I've complained about the commission structures, but all I get is cartel-talk ("We are competitive", etc., etc.). Once you've cut your teeth trading in Canada, having a US broker makes making money a breeze. I had a Brown account for a while, until they found out I was Canadian and cut me off, and at 5$/5000 shares and an enhanced trading platform, making money day trading was a lot easier. Fortunately, there are lots of good investment opportunities in Canada right now. It might actually be the hot market in a few years. 11. How much is enough? This is not a frivolous question. When do you stop being aggressive and enjoy the fruits of your efforts? It would be a shame to get to financial freedom and then lose it all on "one more trade". Maybe like me, you'll want to spend 6 months every year in the jungle, and 6 back in civilization. I like trading, but I've already scaled back and invested in some more conservative holdings. How much money will you need? What are your goals? So, What Did the Oracle Say? How did the I Ching help me become a better trader? Well, we have a very beautiful tree on the West Coast called the Arbutus (Americans call them Madronas). It has a wonderful red, twisty bark, glossy flat leaves, and grows on the thinnest, rockiest soils, often clinging to mountainsides. I have often pictured the judgment of the oracle below as such a tree. As many of you probably know, the I Ching yields a vertical configuration of 6 lines in hexagrams, each line solid or broken, hence 64 possible combinations, each with their own name. The hexagram is broken into 2 trigrams of 3 lines each, an upper and a lower, with each of the 8 possible trigrams corresponding to a universal element. The particular reading I got was wood over the mountain (number 53, "Gradual Progress"). "On the mountain, a tree. A tree growing on a mountain develops slowly according to the law of its being and consequently stands firmly rooted. The superior man is calm and adaptable, thereby attaining gradual progress. A contracting of marriage is indicated, signifying commitment. Through perseverance, things are put in their correct places and success is achieved." So; calm, adaptable, patient, committed. Each reading also carries with it the possibility of "changing" lines, which indicate what things are developing towards (sometimes interpreted as indicating the future). This reading had 2 changing lines leading to earth over the mountain (Number 15) which is labeled... "Modesty. Things are easy for the modest person. Modesty creates success." Oh, one more thing. Changing lines each come with their own little comments. "He must stand outside the affairs of the world in order to understand them." "After success, work on your moral development." Well, there's more, but that's the gist of it. Blew me away. Hope it gave you some food for thought, too. Happy trading everyone.
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